Banks take outsourcing route for credit risk management software

Sangita Mehta, TNNJun 25, 2003, 04.57am IST

MUMBAI: With risk analysis calculations becoming increasingly sophisticated and Basel II (international capital norms) approaching, bankers are preferring to buy risk management software off the shelf and customise it rather than develop it. Most bankers have some form of software to monitor market risk and asset-liability management and haven't turned their attention to installing credit risk software systems.

Some banks have already placed orders or sought bids. These are State Bank of India, IndusInd Bank of India, Indian Overseas Bank and Vijaya Bank. While some banks are installing risk management as part of a larger programme of moving towards a framework of "integrated risk management" others are revamping their existing risk management systems to install sophisticated software.

So far, Punjab National Bank is the only state-owned bank that has developed an in-house model for credit risk and patented it. But as far as the rest are concerned, the trend appears to be to go for outsourcing. Last week, IndusInd Bank awarded a mandate to rating agency Crisil, for developing a credit risk assessment model, against stiff competition from international rating agencies like Moody's. "The rating agency has a huge data base which is essential to understand the sector. Besides, the package is Indianised to suit the requirement of Indian bank," said IndusInd Bank MD Bhaskar Ghosh, On the IRM front, State Bank of India is the latest to join the fray and had asked for expression of interest from consultants in May '03.

Meanwhile, a few public sector banks such as Bank of Baroda, Corporation Bank, Canara Bank and Union Bank of India have implemented IRM in phases, with mixed results. The new Basel II accord, which is expected to be implemented in several developed countries by '06 means enormous business opportunities for the software and consulting companies. Several foreign companies such as Moody's, SAS International, BCG and McKinsey are actively eyeing the Indian market for business. According to Geert Maasa, director, financial services at SAS International, "It is projected that global IT spending on risk management technology will be at $18.8bn this year and would reach $21bn by '06." However, a large section of Indian bankers prefer to deal with Indian companies. The market is still abuzz with rumours that Bank of Baroda was sour about the risk assessment advisory provided by erstwhile Arther Anderson, while Corporation Bank is said to be a bit disappointed with Delloitte and Touche. Though, officials from both banks denied this. sources said in both cases, consultant charged a huge sum and loaded the bank with huge volumes of recommendations. Corporation Bank chairman K Cherian Verghese denied being disappointed with its consultant, adding, "The bank is in the process of implementing the recommendation given by Deloitte and Touche. It's an ongoing process."

Bank of India and Indian Overseas Bank have called for EoI and shortlisted Crisil, Icra, Boston Consultancy, KPMG, IBM Consultancy and Tata Consultancy.

Between public sector and private sector banks, the latter seem to be more evolved in implementing risk management.

Banks like ICICI Bank and HDFC Bank have dedicated huge resources for risk management. IndusInd had appointed KPMG last year for IRM which had recommended the bank to upgrade its credit risk rating model following which it appointed Crisil. Public sector banks, however, seem bogged down with statutory formalities slowing down the entire process of implementing risk management systems and continue to be exposed to various risks.